How to become a forex trader (2024)

How to choose forex pairs to trade

The first step in becoming a forex trader is to select the currency pairs you want to trade, as well as the time of day that you want to open and close your positions. Generally, beginners choose major pairs such as EUR/USD, USD/JPY, GBP/USD and USD/CHF. Here’s why:

High trading volume: this means there are many buyers and sellers in the market and orders are executed fairly quickly and at competitive prices
High liquidity: traders can enter and exit positions easily, without having to worry about slippage or wide bid-ask spreads
Lower volatility: these pairs tend to be more predictable and less prone to sudden spikes in volatility, which can be beneficial for novices
Tight spreads: a tight spread is generally considered to be more favourable for traders because it means that they’ll have to pay less to enter or exit a trade

Minor and exotic pairs can be popular, especially for those interested in emerging markets. There may be lower liquidity in these markets, but they can still be highly volatile. Some of the common pairs include USD/ZAR, SGB/JPY, USD/SGD and CAD/CHF.

For beginners, the best time to trade forex is typically when the LSE and NYSE sessions overlap (between 8am and 12pm UK time), as this is when the forex market is most liquid. During the overlap, there’s also increased volatility, which increases opportunities to take a position.

Understanding what moves forex prices

Part of becoming a successful forex trader is knowing what influences the market. Foreign exchange movements are determined by a variety of factors, including:

Supply and demand

The general law of supply (sellers) and demand (buyers) also applies to the forex market. If there’s high demand for a particular currency but low supply, its value will likely rise. And, if there’s low demand and a high supply, its value will typically drop. The exchange rate between currency pairs also shifts due to changes in supply and demand.

Central banks’ monetary policy

A central bank’s monetary policy can have a significant impact on the prices in the forex market. The bank has a heavy influence on interest rates, exchange regime settings – which manage the value of its currency against others; and currency interventions – actions taken to influence the value of the currency.

Fiscal policy

Governments use fiscal policy to promote a stable economy with strong and sustainable growth. Forex traders would, for example, sell the currency of a country with a high debt ratio (low growth) and buy the currency of a country with low debt ratio (high growth) instead.

Interest rates and carry trades

‘Carry trade’ is a strategy used by institutional investors, who will sell a currency with a low interest rate and use the proceeds to buy a currency with a higher interest rate. The goal is to earn the difference between the two interest rates, known as the ‘carry’.

International trade

The value of a currency can be affected by the balance of trade between the country it belongs to and other nations. A country with a trade surplus, where it exports more goods and services than it imports, may have a stronger currency than a country with a trade deficit, where it imports more than it exports. This is because a country with a trade deficit needs to buy foreign currencies to pay for the imports, which can lead to a decrease in demand for its own currency and a drop in its value.

Macroeconomic statistics

Macroeconomic indicators, such as inflation, growth, and government debt, play a significant role in determining the value of a country's currency in the foreign exchange market.

To make informed decisions, forex traders and investors closely monitor key data points like consumer price inflation (CPI), producer price inflation (PPI), retail price inflation (RPI), interest rates, gross domestic product (GDP), national income, employment, and economic growth rates of different countries. This information is analysed and used to make predictions about the future movement of currency prices.

External factors

External factors, such as war or natural disasters, can also have an impact on the prices in the forex market. For example, natural disasters can disrupt a country's production and supply chain, affecting its economic growth and making its currency less attractive to foreign investors. Similarly, wars can create uncertainty and instability, which can decrease the value of a country's currency.

Using an algorithmic trading system for forex

When you start trading forex, you might be overwhelmed by the busyness of constant market movements. One of the things that can help you to succeed as a forex trader is to use automated (or algorithmic) trading platforms.

What is algorithmic trading?

Algorithmic trading, also known as algo trading or automated trading, is the use of computer programs and algorithms to execute trades in the financial markets. These algorithms are designed to analyse market data, identify trading opportunities, and execute trades based on a set of predefined rules and instructions.

This type of trading is typically used by institutional investors and hedge funds but is also available to individual traders through algorithmic trading platforms and brokers. It allows for faster and more accurate trades and can also analyse and process large amounts of data in real time.

Benefits and risks of algorithmic trading

Trades being executed at the best price

Algo trading algorithms are designed to analyse market data in real-time, and they can identify the best prices to buy or sell a security. This can lead to better trading execution and improved returns

Reduced risk of manual errors when placing a trade

Because the trading process is automated, the risk of human error is reduced, and traders can be more confident that their trades will be executed correctly

Incorrect parameters

If your selected parameters aren’t accurate, you could suffer bigger losses than if you monitored the markets yourself

Compound losses

You run the risk of compound losses due to the higher number of simultaneous trades and the speed at which they’re executed

How to start trading forex

Open a live account or practise on a demo account
Pick the currency pair you want to trade
Decide whether you want to use spread bets or CFDs to trade
Choose how to trade forex – on the spot, or using forwards or options
Set your position size and manage your risk
Place your trade

It’s important to note that, if you want to become a successful forex trader, you’ll need passion and – more importantly – discipline. Every decision you make must be considered with the utmost care. Plus, you shouldn’t trade with a large amount of funds until you become more confident in your skills and strategy.

Like any other market, trading forex is risky – because you’ll be trading on leverage. While this magnifies your exposure by means of margin, it also amplifies your losses. This is why risk management is so important.

To help you grow your confidence, we offer a demo account with £10,000 in virtual funds.

Trading forex using spread bets

Forex spread betting enables you to speculate on a currency pair's price movements – whether they go up or down – by betting a certain amount per point of movement. If the price moves in the direction you predicted, you’ll make a profit, but if your prediction is incorrect, you’ll make a loss.

Spread betting is popular in the UK because it’s exempt from capital gains tax and stamp duty.¹

Trading forex using CFDs

When trading forex CFDs, you’re agreeing to exchange the difference in the price of a currency pair from the time you open the position until you close it. To open the position, a margin deposit is required, which allows for larger profits and losses compared to the deposit amount.

As with spread betting, you’re speculating on currency values without owning the physical assets. When trading CFDs, profits can be offset against losses for CGT purposes.¹

Trading forex on the spot, or using options or forwards

Besides having a choice between spread bets and CFDs, you can also choose to trade forex in the following ways: on the spot, using options, or using forwards.

Spot forex is the immediate purchase or sale of a currency pair at the current market price. Traders with a short-term outlook often trade on the spot. Forex options give the holder the right but not the obligation to buy or sell a currency pair at a specific price on a specific date. Forex forwards are similar to options, but the trader must exercise their right to trade. Traders with a longer-term view often choose options of forwards.

Note that there are funding charges when keeping spot trades open overnight, but not when trading forwards. However, forwards have larger spreads.

Remember, all trading incurs risk – and this risk is multiplied when trading on leverage. Always have solid steps in place to manage your risk.

Becoming a forex trader summed up

The first step in becoming a forex trader is to select the currency pairs you want to trade, as well as the time of day that you want to open and close your positions
Foreign exchange movements are determined by a variety of factors, such as supply and demand, central bank monetary policy, fiscal policy, interest rates and more
Forex traders can use an automated trading system to trade currency pairs, which means they don’t have to monitor the markets at all times
With us, you can trade forex using spread bets or CFDs – and you can also choose to trade on the spot, via options, or via forwards

Sources

¹ Tax laws are subject to change and depend on individual circ*mstances. Tax law may differ in a jurisdiction other than the UK.